Tuesday, October 23, 2012

Housing bear- recovery going no where

In past posts, I provided details on why I think housing has hit a bottom. At the same time however, I also argued why I thought the recovery will likely be lackluster (or at the very least not nearly as strong as implied by gung-ho housing bulls). I have been sitting on this article from Business Insider for a few days (awaiting video links from the Zillow conference the article references), but instead I thought I would go ahead and post some thoughts.

I found the following passages most interesting...
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I was very interested in the comments of Mark Hanson since he has a different view on housing than me (I think prices bottomed earlier this year and that residential investment will continue to increase). Hanson thinks we are just seeing a stimulus bounce and that prices will start falling again. Here are a few of Hanson's comments (from notes and memory - Zillow will have a video of the forum available this week).

Hanson argued there is a substantial "shadow inventory" that will come on the market. He talked about the number of homes with negative equity (CoreLogic puts the number at 10.8 million, Zillow put the number at 15.1 million). Hanson also mentioned 6 million delinquent mortgages (LPS puts the number of properties delinquent or in foreclosure at 5.45 million).

And Hanson also mentioned the 6 million recent modifications (he called modified loans the "new subprime" because he thought a large number would default again). Hanson talked about the high "Back-End Debt-to-Income Ratio" even after modification. What Hanson was referring to was the HAMP programs were the borrowers have substantial debt payments in addition to their mortgage payment (student loan, car, other installment loans). In the most recent HAMP report, the back-end DTI was 53.6% after modification, and the front end DTI (principal, interest, taxes, insurance and homeowners association and/or condo fees) was 31%. With these high back-end ratios, Hanson argued many of these people would default (that is why he called it the "new subprime").
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Now I am one to believe that the housing market has bottomed, but to think that the market will come ripping back is wishful thinking. Investment bubbles go through stages, and typically the period after the bottom is one of stagnation or a flat price trend. This is due to, in my thinking, basic human psychology, as those investor waiting for a bounce become trapped on the downside. This creates potential inventory once the market has bottomed, which weighs on prices as they increase.

Back of the envelope estimates (using the above figures and the latest National Association of Realtors annualized housing sales figures) suggest that the inventory overhand from potential sellers could take up to three years to clear the market. However, the actual time to clear these sellers may actually be longer or shorter depending on the path of future housing prices.

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